News of Note
Levett – Federal Court finds that CRA had “pursued all reasonable domestic means available” before making an information request under the Swiss Treaty
Email this ContentThe applicants (two couples and a corporation owned by one of them), whose disclosure that they had no foreign assets was doubted by CRA, brought an application to have CRA requests to the Swiss federal tax administration for information pursuant to Art. 25 of the Canada-Swiss Treaty declared invalid on the grounds that “the CRA did not exhaust all domestic avenues of compliance and did not provide full and frank disclosure to the Swiss authorities.” In dismissing the application, St-Louis J found:
- Regarding the stipulation in Art. 25, para 1 that “an exchange of information will only be requested once the requesting Contracting State has pursued all reasonable means available under its internal taxation procedure to obtain the information,” she stated (citing Blue Bridge, 2020 FC 893) that the “purpose of the ‘foreseeably relevant’ standard is to maximise the extent of the information that can be exchanged.”
- “[N]othing prevented the CRA auditor from faithfully presenting unconfirmed information or suspicions” to the Swiss authorities.
- Regarding the requirement in s. 2(a) of the Interpretative Protocol to the Treaty that, before sending a request for exchange of information pursuant to Art. 25 of the Convention, the CRA must have pursued “all reasonable means available under its internal taxation procedure to obtain the information” she found (at para. 162) that she was “satisfied that the CRA pursued all reasonable domestic means available” in light of the various roadblocks faced by CRA (e.g., the individual applicants claimed to have no foreign assets and to have no relationship with the corporations named by the AMF).
- Furthermore, the information sought of the corporate applicant was in the possession of a foreign corporation (“Socimbal”), as to which St-Louis J stated that the “auditor had no legal authority to require information from the contact person at Socimbal, as he was not a Canadian resident or a person carrying on business in Canada” and that “the Applicants have not convinced me that the CRA had a legal obligation to contact the person abroad simply because it was provided with the contact information.”
Neal Armstrong. Summary of Levett v. Canada (Attorney General), 2021 FC 295 under Treaties –Income Tax Conventions - Art. 27.
CRA considers that a Canadian Amalco was “incorporated” in Canada
ETA s. 132(1)(a) provides that a corporation is deemed to be resident in Canada if it “is incorporated or continued in Canada and not continued elsewhere.” CRA indicated (perhaps based on Deltona) that where two corporations are amalgamated in Canada, the amalgamated corporation is considered to have been incorporated in Canada. Although a Canadian corporation that is continued outside Canada will not thereafter be considered to have been incorporated in Canada, it will nonetheless be resident in Canada if its central management and control is in Canada - and it will be deemed under s. 132(2) to be resident in Canada in respect of activities carried on by it through any Canadian permanent establishment.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.17 under ETA s. 132(1)(a).
CRA indicates that payments to a retired partner generally are GST/HST exempt
CRA confirmed that payments made to a retired partner generally would be considered as consideration for an exempt financial service (assuming no rendering of services), including payments to which ITA s. 96(1.1) applies (which, broadly speaking, are treated for ITA purposes as akin to deferred earnings), stating:
When a partner acquires partnership units (i.e. an interest in a partnership), the partner has acquired certain rights which include a right to receive distributions. To the extent that payments made by a partnership to a retired partner are in respect of an interest in the partnership, or any right in respect of such an interest, the payment would be consideration for an exempt supply of a financial service … .
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.16 under ETA s. 123(1) – para. (f).
Krumm – Federal Court of Appeal confirms the tax shelter rules’ application to a private purchase of “Class 12 available-for-use” software with tax deductions not further spelled out
The classic tax shelter provided a computation showing how much tax an investor in the top marginal bracket would save. Here, the taxpayer acquired a 50% interest in software after being provided with a valuation report that included a tax opinion indicating that the software was Class 12 property that qualified as being available for use – no tax savings or deduction numbers. Woods JA agreed with Visser J below that this was sufficiently tantamount to representing that the cost of the software could be written off over two years - so that there was an unregistered tax shelter, resulting in the CCA claims being denied under s. 237.1(6).
Woods JA also stated:
… [T]he valuation report makes it clear that the report was intended to influence prospective purchasers. As for the interpretation of the tax shelter definition, there is nothing in the text or context which suggests that the provisions are intended to be limited to publicly marketed transactions. … Finance has expressed concern about “abuses through aggressive tax shelter promotions” … Th[is] concern … would be frustrated if the legislation were applicable only to certain types of promotions.
Neal Armstrong. Summary of Krumm v. Canada, 2021 FCA 78 under s. 237.1(1) – tax shelter – (b).
CRA indicates that comparable sales of used MURCs for s. 191(3) purposes may reflect embedded GST/HST
In the context of an inquiry on determining the fair market value of a new apartment building (or other ”MURC”) when there is a self-supply at the time of substantial completion and first occupancy, CRA noted that where the cap rate used in applying the income approach to valuing the MURC was derived from comparable sales of occupied MURCs, such comparables may reflect “GST/HST that may be imbedded in the consideration for a supply as a result of the GST/HST having been imposed at an earlier time.” On the other hand, “where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the GST/HST imposed on that supply, even where the supply was ‘GST/HST included’, is excluded from the consideration.”
This might imply that where a newly-occupied Ontario apartment building had an FMV of $11M having regard to comparable sales of other apartment sales in the area, that same apartment building might have had an FMV of $10M immediately before the time of the deemed self-supply (treating the Ontario tax rate as being around 10% net of new rental housing rebates), i.e., a purchaser at that point in time would discount for the impending self-supply tax. S. 191(3) is unclear as to whether, in this example, the FMV of the building should be treated as $10M or $11M (and CRA did not address this issue), but one could confidently predict that it would go for the higher number.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.15 under ETA s. 191(3).
CRA indicates that whether receipts are gross REIT revenue is informed by their accounting treatment
A mutual fund trust is the limited partner in a subsidiary partnership, which is undertaking the development and construction of a new multi-unit residential rental property, funded with equity contributions and loans.
"Gross REIT revenue” of an entity is defined as “the amount, if any, by which the total of all amounts received or receivable in the year (depending on the method regularly followed by the entity in computing the entity's income) by the entity exceeds the total of all amounts each of which is the cost to the entity of a property disposed of in the year.”
CRA intimated that it generally would not consider various amounts received by the partnership to be gross REIT revenue for REIT-test purposes where the amounts “would not be considered ‘revenue’ within the ordinary meaning of the term nor under the well-accepted business and accounting practices.” Accordingly, the following receipts would generally be excluded:
- loan proceeds and equity contributions to the partnership
- input tax credits
- the GST/HST new residential rental property rebate received on substantial completion and first occupancy
- volume discounts and rebates from suppliers
CRA noted that “[f]or accounting purposes, ITCs, the HST Rebate and volume discounts and rebates from suppliers would normally reduce the amount of the expense or the capital cost or adjusted cost base of the related property.”
Neal Armstrong. Summary of 22 February 2021 External T.I. 2018-0784661E5 under s. 122.1(1) – gross REIT revenue.
102751 Canada Inc. –Quebec Court of Appeal finds that legal fees incurred to recover a misappropriation of substantially all the taxpayer's assets were currently deductible
After substantially all of the assets of a Canadian corporation (Mobile) owned by a German family were misappropriated by a Canadian director (Black), Mobile brought an action against him, with the action subsequently being settled in 2012 by the payment by Black of an agreed sum plus interest thereon at 5%. The Court confirmed the finding of Cameron JCQ below that the various legal and accounting fees incurred by Mobile were fully deductible rather than being capital expenditures: the fees had been incurred to preserve Mobile’s income-producing assets and there had been a resulting generation of the interest of 5%.
Neal Armstrong. Summary of Agence du revenu du Québec v. 102751 Canada Inc., 2021 QCCA 605 under s. 18(1)(a) – professional fees.
CRA is considering whether a GST/HST waiver can be restricted to a specific issue
ETA s. 298(7) provides that a person may waive the application of the time limits for being assessed in respect of a “matter” specified in a waiver made by it. CRA is mulling over whether, in the context, for example, of a CRA audit of taxable and exempt supplies made by a registered supplier, it should take the position that, since any assessment made by it would be only for the registrant’s global net tax number, therefore it would not be permissible for the supplier to limit a waiver to whether a particular supply was exempt or taxable – instead, the “matter” at issue must be regarded as the entire net tax calculation for the reporting period.
A similar spurious issue could be (but has not so far been) raised on the income tax side, given that a Part I tax assessment is for a single Part I tax number.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.14 under ETA s. 298(7).
Income Tax Severed Letters 21 April 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Allegro Wireless – Tax Court of Canada finds that software development qualified as SR&ED
Somewhat unusually, the development of software was found to be SR&ED. The taxpayer, which provided a software platform to its clients that permitted their workers to access the client systems through handheld devices, faced significant technological challenges in identifying ways to permit this to occur consistently. D’Arcy J stated:
I have concluded that when the Appellant conducted the projects at issue, it formulated hypotheses specifically aimed at reducing the identified technological uncertainty, followed appropriate procedures on testing, including the formulation, testing, and modification of hypotheses, and maintained a detailed record of the hypotheses tested and results achieved as the work progressed.
It also did not hurt that the projects “were the same or similar to projects in respect of which the Appellant received grants from the National Research Council of Canada.”
Neal Armstrong. Summary of Allegro Wireless Canada Inc. v. The Queen, 2021 TCC 27 under s. 248(1) - SR&ED.